Scorecard: Private pension vs workplace pension
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Are you getting the most out of your pension scheme? The type of pension you have, and the underlying investments you choose, can have a big impact on your income and lifestyle in retirement. Below, our Grantham financial planners explain the main differences between workplace pensions and private pensions in the UK – outlining some of the key advantages and disadvantages of both.
For a bit of fun, we will present this in a “scorecard” fashion – announcing a “winner” at the end. However, please note that this is lighthearted and there is no single pension solution which is right for everyone. For certain individuals, their workplace pension may be the best tool to achieve their retirement goals. For someone else, it could be a private pension.
To discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Round 1: Ease of use
It will help to briefly recap the main differences between a workplace and a private pension. The former is set up by your employer and can take one of two forms: a pension “pot” (defined contribution pension) or a defined benefit pension. For this discussion, we will primarily be referring to the former type of workplace pension.
A private pension (also called a “personal pension”) is a pension pot which is set up by an individual alone. Here lies the first main difference between a workplace and private pension. The first brings you immediately onto the organisation’s pension scheme via auto enrolment. Monthly contributions to the scheme are taken out of your salary, on your behalf.
In short, most people find a workplace pension easier to manage and stay consistent with. Personal pensions, however, involve a lot more individual responsibility to set up properly and contribute regularly.
Score:
Workplace pension 1 : Personal pension 0
Round 2: Flexibility
With a workplace pension, your scheme may offer a limited range of fund choices for you to invest your contributions in. By contrast, when choosing a personal pension, you can shop around and examine the different investment opportunities offered by different providers – choosing the best one for your needs and goals.
A workplace pension is also less “portable” than a personal pension. The latter can be carried around with you regardless of your employer. However, if you change jobs, then your regular contributions into your old workplace pension will cease.
Over the course of a career, this can create a very cluttered pension portfolio if you accumulate multiple pots over, say, ten different jobs – or more! This issue can be addressed later by consolidating various pension pots as you approach retirement, but it can make your pensions difficult to manage in the interim.
Score:
Workplace pension 1 : Personal pension 1
Round 3: Costs & returns
Which type offers more investment growth potential – a workplace pension or a private pension? This question is more difficult to answer due to the wide range of variables involved.
A workplace pension arguably has a strong advantage because it benefits from employer contributions. In 2023-24, auto enrolment rules dictate that an employee must contribute at least 5% to their workplace pension and the employer must put in 3%. The latter is effectively “free money” and can add a significant boost to your fund value over time.
However, these employer contributions can be undermined if the various costs of the workplace pension are not very competitive. For instance, perhaps many of the funds within the scheme are actively managed and involve quite high management fees – eating into the member’s returns. By contrast, a personal pension could be constructed by an individual in a much “cheaper” way, keeping fees to a minimum (e.g. by focusing on “passive” funds which track the market, rather than trying to beat it using active funds).
There are many personal pensions that can accept employer pension contributions, provided your employer is willing to redirect these. In such cases, the benefits of personal pensions can be combined with the additional savings for very lucrative results.
Overall, this round leans more towards the privatepension. We now have the final score!
Score:
Workplace pension 1 : Personal pension 2
Conclusion & invitation
This pension competition was a bit of fun intended to highlight the main differences, pros and cons between workplace and personal pensions. It should not be taken as financial advice about what to do with your own pension(s)!
It is worth stating that the two types of pension can work well together in an overall retirement plan; they do not necessarily have an adversarial relationship. For instance, perhaps your employer offers “contribution matching” – promising to match your own workplace pension contributions up to a certain amount (e.g. 10%).
Here, you might choose to contribute 10% to your workplace pension to get the full benefit of your employer contributions. On the side, you might also have your own personal pension which you put the rest of your monthly contributions into – choosing investments and funds which you have personally selected.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
